Cogeneration: Producing Heat and Light and Profits

Two thirds of the energy people produce is wasted. It goes up power plant chimneys or dissipates into rivers and lakes through heat exchangers. Capturing this wasted heat would greatly reduce fuel costs and dramatically cut the emissions of carbon dioxide, which are thought to contribute to global warming. Cogeneration, or producing and using electricity and heat simultaneously, is the business opportunity being pursued by companies like Westmont, Ill. based Recycled Energy Development (RED) and White Plains, N.Y. based Trigen Energy.

“The idea is to use energy twice,” explains RED chairman Thomas Casten. “One time to make electricity and another to supply thermal energy.” In a world in which businesses will have to pay for emitting each ton of carbon dioxide, this kind of energy and fuel efficiency will become very attractive.

How does cogeneration work? Cogeneration is not just one technology, but a suite of technologies whose central goal is to recycle energy. For example, the high pressure, high temperature steam that is used to drive electricity generating turbines can be used to heat buildings or in various industrial processes needing steam.

Conversely, steam produced for use in industrial processes can be captured and used to drive turbines to produce electricity.

Cogeneration is not a brand new idea. Thomas Edison’s Pearl Street generating plant, opened in 1882, produced both electricity and heat for lower Manhattan. Edison’s plant is an example of “district heating,” in which steam left over from driving electricity generating turbines is piped to surrounding buildings to warm them. Steam can be piped about three to five miles. Today, Con Edison runs the largest district heating system in the world; seven cogeneration plants supply heat to 100,000 buildings.

Casten, one of the leading figures in the recycled energy business, has spent more than 30 years developing and operating combined heat and power plants as a way to save money and lower carbon dioxide emissions. As the CEO of the recycled energy companies Trigen Energy and Primary Energy Ventures, Casten oversaw the development of more than 200 cogeneration projects worth about $2 billion. In 2006, he founded RED. (His son, Sean Casten, serves as RED’s CEO). Backed by Boston based Denham Capital, RED plans to deploy recycled energy projects worth $1.5 billion over the next five years.

The Cogeneration Catch-22

If recycling energy is such a good idea, why hasn’t it been done more widely? In a word, regulation. Center on Globalization, Governance and Competitiveness at Duke University analysts Marcy Lowe and Gary Gereffi assert, “The web of U.S. regulatory policies favors inefficient centralized power production and penalizes or blocks decentralized alternatives.” Casten points out that utilities have generally opposed cogeneration. “The utility sector is unlike the rest of the economy. It is subject to centralized planning and there’s nothing capitalist about it,” says Casten. “Utilities live in a world of cost plus. Utilities have traditionally made money on how much they invest, not how efficient they are. It’s the only industry that increases its profits when a company redecorates its president’s office.”

Electric utilities are regulated monopolies. While deregulation is improving the situation, the classic way for utilities to make more money is to sell more electricity. Their profits have been based on rates set by state utility commissions with the goal of recovering the costs of equipment placed into service. “In most states, utilities are guaranteed a profit based on a percentage of their costs,” says Casten. “Since improving efficiency would lower costs, it would also lower profits.”

Utilities have traditionally made money on how much they invest, not how efficient they are.

The consequence of this regulatory coddling, according to Northwestern University economist Lynne Kiesling, is that “the electric power industry is one of the least innovative industries in the modern economy.” As a result, Casten claims, “The delivered electric efficiency is a pathetic 33 percent and has not improved since Eisenhower was in the White House.” Building more transmission lines and generating capacity means more money; producing energy more efficiently does not.

From the point of view of utilities, having steady, big customers like steel plants, concrete manufacturers or oil refineries produce their own power means that they lose significant sales meant to cover the costs of their embedded generating and transmission facilities. Although the situation is improving, most states maintain old regulations that protect utility company capital investments, which, in turn, discourage cogeneration projects.

Consider that all states have regulations that ban private electric wires that cross any public property. This means that co generators cannot sell directly, but must go through the distribution monopoly run by the incumbent utility. As a competitor to the co generator, the utility buys the co generator’s power at very low prices and then charges high prices to distribute it.

In some states, the regulatory situation is even more ridiculous. For example, a co generator at a steel mill would not be allowed to sell electricity generated at the steel mill using the plant’s exhaust heat. Instead, the co generator is required to “sell” its electricity to the utility, which would then sell it back to the steel mill. As monopolists, utilities can and do demand deep discounts from a would-be co generator, effectively killing what would otherwise be financially sound projects.

In addition, utility commissions often allow power companies to charge “exit fees” to customers who propose to build cogeneration facilities as though co generators are somehow “stealing” customers from the utilities. It is somewhat like forcing Wal-Mart to pay Target a fee when a consumer switches from one store to another.

Co generators also argue that they should be rewarded for building distributed generation facilities that enhance the stability of the power grid and thus provide greater security to utility customers. Allowing co generators access to the grid also means that utilities do not have to build and maintain as much expensive reserve capacity. And local cogeneration saves energy by avoiding the typical transmission and distribution losses of 6 to 10 percent.

Despite these past roadblocks, it is likely that the deployment of cogeneration facilities will be dramatically spurred on if the federal government addresses the problem of manmade global warming by rationing carbon dioxide emissions. Last June, the House of Representatives passed the American Clean Energy and Security (ACES) Act, which would create a cap-and-trade system. Under ACES, the U.S. by 2020 would cut its greenhouse gas emissions by 17 percent below the level emitted in 2005 and by 80 percent in 2050. The federal government would distribute permits (initially, most would be free) based typically on a company’s past level of emissions. A similar bill is now pending in the Senate.

An enterprise will have to have an allowance for each ton of carbon dioxide it emits. If it doesn’t have enough, then it can buy additional ones from another company that is under its own emissions limit. This market in emissions permits will set a price on carbon dioxide and raise the price of energy. Under ACES, co generators would be allocated 0.35 percent of emissions permits at no cost, which by some estimates could be worth as much $4.2 billion per year.

The $787 billion stimulus bill passed last spring included $156 million in U.S. Department of Energy (DOE) funding for cogeneration projects. The DOE received 359 applications for projects valued at $9.2 billion. In August, Sen. Bernie Sanders (Ind.-Vt.) introduced the Thermal Energy Efficiency Act, which would provide $1.5 billion in annual subsidies for building cogeneration facilities.

Many states have adopted requirements that utilities obtain a certain percentage of their power from renewable sources like solar and wind, so called renewable portfolio standards (RPS).Casten points out that power produced by cogeneration is as clean as renewable energy, yet is not included in these state RPS mandates. Instead of specifying energy technologies, he argues, why not set up a system of permits that are output based rather than input based?

For example, the federal government would issue permits to each electric power producer equal to its average emissions, about 0.62metric tons of carbon dioxide for each megawatt hour of electricity delivered and 0.32 tons of carbon dioxide for each megawatt hour of thermal energy. Each plant that generates power or heat must obtain allowances equal to its total carbon dioxide emissions. If a high carbon facility has too few permits, it can purchase enough to offset its emissions from a low-carbon plant.

In contrast to the cap-and-trade system being devised by Congress, average energy prices to consumers will not increase because the total cost of the allowance purchases will equal the revenue from allowance sales. Of course, energy producers that emit lots of carbon will lose while those with low emissions will benefit. Over time, the number of permits issued will decline. An annual 4 percent decline in carbon allowances would cut U.S. Carbon dioxide emissions by 80 percent in 2050.

Evaluating Outputs

Under this output based system, renewable, nuclear and recycled energy projects would earn allowances that could be sold to enhance their profitability. So unlike the cap-and-trade system that wields only the stick of costly emissions permits, a system of output based allowances offers both carrots and sticks to power generators. Power producers can earn more allowances to sell by deploying low carbon and no carbon energy generation. “Output based allowances reward all activities that deploy low carbon generation and penalize the operation or deployment of high carbon generation, thereby unleashing innovation and creativity,” explained Casten in the spring 2009 issue of Climate Alert.

So what kinds of projects are currently operating? Consider the deal worked out by Mittal Steel and Sun Coke at their East Chicago, Indiana, facilities. It is efficient to have coke making facilities located next to the steel mills that use their outputs. Coke is produced by baking bituminous coal at very high temperatures in low oxygen conditions to produce the high carbon fuel. Iron ore and coke are combined in blast furnaces to produce iron. Primary Energy Recycling Corporation collaborated with Mittal Steel and Sun Coke (a division of Sunoco) to develop a 95 megawatt waste heat recovery, combined heat and power (CHP) facility that provides electricity and process steam to Mittal Steel’s steel plant. The plant produces 500,000 tons less carbon dioxide emissions per year than plants using separate heat and electricity sources.

Casten’s RED is building a $100 million waste heat recovery project at West Virginia Alloys in Alloy, W. Va. The West Virginia Alloys plant is the world’s biggest maker of the pure silicon used in microchips and solar panels. It produces silicon by melting quartz rock in five electric arc furnaces heated to 1,500 degrees Fahrenheit. The hot exhaust from the furnaces will be diverted to boilers to produce steam that will then drive electric generators. When the project is completed in 2010, the 45megawatt capacity facility will generate enough power for 20,000 homes and will supply about one-third of Alloys’ electricity needs. Since it is powered by waste heat, there are no fuel costs and the project will avert the emission of 290,000 tons of carbon dioxide.

Output-based allowances reward all activities that deploy low carbon generation and penalize the operation or deployment of high carbon generation, thereby unleashing innovation and creativity.

One note of caution: Studies have found that many early cogeneration projects did not provide the efficiencies promised. Each project is different and must be carefully designed and rigorously monitored.

How a big a business opportunity is cogeneration? Estimates vary, depending upon the assumptions made. A recent report, Unlocking Energy Efficiency in the U.S. Economy, by the international business consultancy McKinsey, suggested that U.S. Cogeneration capacity could be profitably expanded by 50 giga watts by 2020. Such an expansion would cost $56 billion and save $77 billion annually, while reducing carbon dioxide emissions by 100 million metric tons per year. In a report for the Center on Globalization, Governance and Competitiveness, analysts Lowe and Gereffi noted, “Various forms of recyclable waste energy represent an estimated 100 giga watts (GW) of potential electric capacity—an amount roughly equal to 10 percent of the current U.S. grid requiring no or little additional fuel. The resulting reduction in carbon dioxide emissions would be an estimated 400millionmetric tons.” In 2008, the Oak Ridge National Laboratory outlined a scenario in which policies encourage aggressive efforts to deploy cogeneration. In that scenario, 20 percent of U.S. power could be produced using cogeneration by 2030. This would reduce U.S. carbon dioxide emissions by 800 million metric tons, the equivalent of removing half our passenger vehicle fleet.

If carbon rationing becomes a reality, the case for pursuing cogeneration opportunities will become compelling for many businesses, especially heavy manufacturing companies. Recycled energy guru Casten’s bottom line? “I’m a techno-optimist and a market believer,” says Casten. “Technology will solve most pollution issues and allow us to live on the planet.” And make a profit while doing it.Ronald Bailey is Reason magazine’s science correspondent.

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